What is a 'Vostro Account'
A vostro account is the account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart. For example, if a Spanish life insurance company approaches a U.S. bank to manage funds on the Spanish life insurer's behalf, the account is deemed by the holding bank as a vostro account of the insurance company.
BREAKING DOWN 'Vostro Account'
A vostro account is established to enable a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank to execute wire transfers, withdrawals and deposits for customers in countries where the domestic bank does not have a physical presence. The term vostro translated from Latin means "yours," as in your account. From the correspondent bank’s point of view, the funds held on the behalf of other banks are referred to as vostro accounts and are denominated in the local currency.
From the perspective of domestic banks, the funds deposited at correspondent banks are referred as nostro accounts. Nostro translated from Latin means "ours," as in our accounts. Nostro accounts are denominated in the foreign currency of the correspondent bank.
Vostro Accounts in an Agency Relationship
For most banks, the cost of establishing a physical presence in every country their customers might need banking services is prohibitive. As a solution, domestic banks can initiate agency relationship agreements with correspondent banks to transact business for customers who are traveling or living abroad.
With these relationships in place, the customer of a domestic bank can walk in to the office of a correspondent bank to withdraw or deposit funds. For example, to process a customer’s withdrawal of funds at a correspondent bank, the domestic bank deducts the withdrawal amount plus any fees from the customer’s account and executes a transfer to the vostro account held by the correspondent bank. The funds are converted to the local currency, deducted from the vostro account and paid to the domestic bank’s customer, less the applicable fees.
Vostro Accounts in an Intermediate Relationship
When funds are wired between a domestic and a foreign bank that do not have a direct relationship, a correspondent bank acts as the intermediary in the transaction. To facilitate the wire, the originator of the transfer sends the amount of the wire plus applicable fees to the vostro account held on its behalf by the correspondent bank. The correspondent bank deducts the fees and the amount of the wire from the vostro account and executes a domestic wire to the receiving bank.